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NATIONAL  ASSOCIATION 

of 

COST   ACCOUNTANTS 


Official  Publications 


Vol.  Ill     DECEMBER  1,  1921         No.  6 


Some  Phases  of  Cost 
Accounting  in  the 
Chemical  Industry 


BUSH   TERMINAL  BUILDING 
130  WEST  42nd  STREET,  NEW  YORK 


NATIONAL    ASSOCIATION    OF 
COST     ACCOUNTANTS 


Official  Publications 


Vol.  III.  No.  6 


December  1,  1921 


Some  Phases  of  Cost  Accounting 

in  the 
Chemical  Industry 


C.  B.  E.  ROSEN,  M.  B.  A.,  C.  P.  A. 

Charles  F.  Rittenhouse  and  Co. 

BOSTON 


BUSH  TERMINAL   BUILDING 

130  WEST  42nd  STREET,  NEW  YORK  CITY 


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COPYRIGHTED    BY 

NATIONAL  ASSOCIATION  OF 
COST    ACCOUNTANTS 

DECEMBER  1,  1921 


*  ..':' :. 

National    Association    of    Cost    Accountants 

SOME  PHASES  OF  COST  ACCOUNTING  IN  THE 
CHEMICAL  INDUSTRY 


Cost  Accounting  in  the  chemical  industry  presents  many  in- 
teresting phases  of  both  process  costs  and  production  order  costs. 
This  article,  however,  deals  chiefly  with  process  costs.  In  some 
classes  of  chemical  plants  the  process  cost  system  is  the  prevailing 
type  of  cost  system;  in  others,  the  production  order  type.  Since 
some  of  the  detailed  work  in  the  cost  department  of  any  business 
is  more  or  less  similar,  such  work  is  not  described  in  this  article 
but  only  the  principal  features  of  the  cost  accounts  in  a  chemical 
concern.  In  a  chemical  plant  the  cost  accountant  should  furnish 
such  principal  facts  as  the  following:  The  cost  of  converting  the 
raw  materials,  the  manufacturing  overhead,  the  manufacturing 
cost  in  bulk,  the  factory  cost  of  the  product  packed  or  otherwise 
prepared  for  shipment,  and  the  selling  cost.  Such  problems  as 
by-products,  repairs,  depreciation,  obsolescence,  overhead  and  its 
distribution,  and  containers  should  also  be  considered. 

In  a  large  chemical  concern  the  work  of  the  cost  accounting 
department  may  be  subdivided  advantageously  between  the  factory 
and  general  offices,  the  former  having  to  do  only  with  quantities 
of  materials,  supplies,  productions,  shipments,  and  inventories, 
and  in  the  value  of  labor;  and  the  latter  having  to  do  with  the 
values  of  the  quantities  reported  by  the  factory  office,  and  the  sum- 
marized labor  charges.  This  requires  the  perfection  of  a  system 
of  prompt  inter-office  reports.  For  smaller  companies,  this  sub- 
division may  be  unnecessary. 

Another  purpose  of  this  article  to  discuss  this  subject  with  a 
view  to  providing  monthly  costs,  which  are  desirable,  yet  figures 
covering  a  longer  period  of  three  or  six  months  are  likely  to  prove 
more  reliable,  due  to  the  variable  conditions  arising  in  the  produc- 
tion of  chemicals. 

The  manufacture  of  chemicals  requires  a  diversity  of  products 
and  chemical  strengths  which  makes  it  impossible  to  have  complete 
uniformity  in  the  cost  data. 

A  chemical  plant  is  divided  into  departments,  each  one  manu- 
facturing a  distinct  product,  generally  in  its  own  special  building 
with  its  own  equipment.  The  cost  records  are  kept  by  departments. 

Owing  to  the  relationship  of  some  of  the  basic  chemicals  to 
the  minor  products,  a  material  fluctuation  in  a  basic  chemical  may 
affect  very  decidedly  the  cost  figures  of  the  other  products.  Many 
products  are  manufactured  in  groups,  that  is  to  say,  the  production 

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of  one  major*  pro'duct  may  'involve  one  or  more  other  products 
which  may  be  manufactured  either  in  separable  steps  in  a  continu- 
ing process,  or  as  by-products.  The  cost  of  manufacturing  the  sep- 
arable steps  in  a  process  can  be  ascertained  usually,  but  the  cost 
of  manufacturing  by-products  cannot  be  determined  accurately. 
Therefore  it  is  accounted  for  on  an  arbitrary  basis.  The  value  at 
which  by-products  are  brought  into  the  cost  accounts  varies  in 
accordance  with  the  effect  which  the  management  may  desire  on 
the  cost  figures  of  the  principal  product,  which  in  turn  may  affect 
the  costs  of  several  .other  products.  By-products  are  accounted 
for  as  produced.  Furthermore,  the  unit  of  measure  and  the  degree 
of  chemical  strength  varies  between  the  different  products.  The 
units  of  measure  may  be  either  gallons,  pounds,  hundred  pounds, 
net  tons,  or  gross  tons,  and  products  may  be  quoted  on  one  basis 
on  the  market  and  their  costs  recorded  on  another  basis. 

These  facts  of  course  do  not  vary  the  elements  of  cost,  but  they 
do  make  the  unit  cost  figures  of  variable  meaning.  In  the  case  of 
major  products  manufactured  in  different  strengths  this  condition 
is  remedied,  however,  by  the  use  of  chemical  factors.1 

COST  SHEET 

The  following  is  a  form  of  cost  sheet  for  monthly  reports  of 
manufacturing  cost  in  bulk,  which  can  be  adapted  to  a  columnar 
cost  ledger,  so  as  to  show  comparative  monthly  costs  on  the  ledger. 

Manufacturing  Cost  of 

Month  of 192 

Cost  per  Unit 

of  Measure 
Pounds  @  Amount  Produced 

Raw  Materials: 
$.... 


Less: 

By  Products 

Net  Cost  of  Raw  Materials : 

Conversion  Cost: 
Labor 

Power,  Light  &  Heat 
Fuel 
Supplies 
Repairs 

Total  Conversion  Cost 


1  See  Appendix  for  further  comment. 

4 


Cost  per  Unit 

of  Measure 
Pounds  @  Amount  Produced 

Shop  Cost  $ 

Overhead  Expense: 

Taxes  ? 

Insurance  ....  .... 

Depreciation  ....  .... 

Works  Expense  ....  .... 


$.... 
Less: 

Loss  from  Idle  Plant  .... 

Overhead  Chargeable  to  Production 
Cost  in  Bulk — Quantity 


Yield % 

This  form  of  manufacturing  account,  as  well  as  subsidiary 
accounts  for  raw  materials,  supplies,  manufacturing  expenses, 
finished  goods  and  sales  should  be  kept  in  a  factory  ledger  and 
controlled  by  the  general  ledger. 

In  many  non-chemical  concerns  such  items  as  power,  fuel, 
supplies  and  repairs  are  generally  considered  as  overhead,  and  not 
as  direct  costs.  In  a  chemical  plant,  however,  where  each  product 
for  all  practical  purposes  is  an  independent  manufacturing  unit, 
these  items  are  considered  as  direct  operating  costs  in  converting 
the  raw  materials  into  the  desired  finished  chemical.  Power  is 
used  in  stirring  or  heating  the  contents  of  the  large  mixing  tanks, 
or  for  refrigeration  in  other  cases.  Fuel  is  used  in  boiling  down 
liquids  or  heating  salts  in  the  extraction  of  gases.  Supplies,  such 
as  water  and  sundry  items,  are  necessary.  Repairs  to  the  buildings 
and  apparatus  are  also  constantly  necessary,  owing  to  the  action  of 
the  chemicals. 

RAW  MATERIALS 

Raw  materials  are  either  purchased  in  a  state  ready  for  imme- 
diate consumption,  or  in  a  state  which  requires  grinding,  drying  or 
other  treatment  before  they  are  suitable  for  use. 

A  record  of  all  materials  received  is  kept  in  the  receiving 
department  and  reported  to  the  cost  department,  and  should  corre- 
spond with  the  quantities  shown  on  the  invoice  after  adjusting 
the  differences  between  the  invoice  weights  and  the  receiving 
department's  weights. 

Separate  accounts  properly  controlled  are  kept  for  each  raw 
material  in  quantity  and  amount.  In  these  accounts  all  charges 

5 


such  as  invoice  cost  inward  freight  and  hauling,  containers,  duties 
and  insurance,  and  handling  charges  are  accumulated;  as  well  as 
credits  for  salvaged  incoming  containers,  for  materials  lost  due 
to  evaporation,  and  similar  items  which  affect  the  cost  of  the  raw 
material  delivered  at  the  plant. 

If  the  raw  material  must  be  ground  or  otherwise  treated  and 
such  treatment  is  of  sufficient  volume  to  make  it  practical,  it  is 
accounted  for  separately  as  a  distinct  process.  The  separate  ac- 
counts show  the  original  material,  the  cost  of  grinding,  or  conver- 
sion, which  would  include  labor,  power,  supplies,  and  repairs,  and 
a  proportion  of  factory  overhead.  This  separate  information  is 
of  value  when  comparing  the  cost  of  the  raw  material  treated  at 
the  factory  with  the  cost  of  purchased  material  suitable  for  con- 
sumption when  received. 

Brief  mention  might  be  made  of  the  relation  of  incoming  con- 
tainers to  the  purchases  of  raw  materials.  Raw  materials  are 
received  in  bulk,  or  in  containers,  such  as  bags,  barrels,  carboys, 
drums  or  cylinders.  These  containers  may  be  either  non-return- 
able or  returnable.  Non-returnable  containers  are  charged  into 
the  cost  of  the  material.  It  may  or  may  not  be  advisable  to  sep- 
arate returnable  containers  from  the  cost  of  the  raw  material.  In 
the  case  of  bags,  for  instance,  the  number  which  can  be  salvaged 
is  not  always  easy  to  determine.  In  such  a  case  it  is  more  prac- 
tical to  charge  them  into  the  cost  of  the  materials,  and  credit  them 
out  when  salvaged.  Returnable  containers  which  are  easily  sep- 
arated are  charged  direct  to  "Containers  Returnable  to  Vendors." 
This  latter  account  is  also  charged  with  returnable  containers 
formerly  charged  into  the  material  cost  when  they  are  salvaged, 
at  which  time  a  credit  is  made  to  the  raw  material  account. 

When  all  the  proper  charges  to  raw  materials  for  the  month 
have  been  recorded  on  the  accounts,  the  raw  materials  used  during 
the  month  must  be  charged  out,  as  well  as  any  losses  sustained. 
In  order  to  dp  this,  a  report  of  the  monthly  consumptions  and  of 
any  losses  which  may  have  occurred  must  be  obtained.  This  report 
can  not  always  be  prepared  accurately  and  in  detail.  Materials 
handled  in  small  quantities  are  easily  accounted  for.  Materials 
handled  in  large  quantities,  however,  necessitate  the  use  of  the  best 
estimates  that  can  be  obtained 

Owing  to  the  fact  that  a  chemical  plant  is  generally  spread 
out  over  considerable  territory,  and  in  the  interest  of  economy, 
raw  materials  handled  in  large  quantities  must  be  received  and 
stored  at  a  point  which  is  the  nearest  possible  one  to  the  place 
of  consumption.  From  a  practical  standpoint,  this  condition  does 
not  permit  a  constant  watch  over  all  the  raw  materials  in  order 
to  obtain  detailed  accuracy  in  the  recording  of  quantities  used. 

As  the  materials  are  consumed  they  are  measured  and  reported, 
or,  in  some  cases,  they  may  be  taken  without  any  record  being 

6 


made.  In  the  former  case  daily  records  of  quantities  consumed  are 
kept  and  summarized  monthly.  In  such  cases  where  no  record 
is  made  of  each  withdrawal  from  stock  the  monthly  consumptions 
must  be  arrived  at  by  deduction. 

This  procedure  is  also  followed  in  testing  the  monthly  con- 
sumptions of  those  materials  for  which  daily  reports  of  withdrawals 
from  stock  can  be  obtained. 

The  closing  book  inventory  is  tested  with  the  actual  inventory 
as  often  as  possible.  The  consumption  of  large  quantities  cannot 
be  measured  exactly.  Consequently,  this  periodic  test  of  inven- 
tories is  necessary  to  avoid  large  errors,  and  the  consequent 
adjustments. 

Where  the  difference  is  not  of  consequence  and  is  not  due  to 
causes,  such  as  evaporation  or  dissolution,  it  can  be  distributed 
over  the  departments  using  the  raw  material  on  the  basis  of 
consumptions. 

At  the  end  of  each  month  the  works  accounting  department 
reports  to  the  cost  department  the  amount  of  the  different  raw 
materials  on  hand  at  the  works,  stating  the  amount  in  quantities 
of  the  opening  inventory,  purchases,  consumptions,  adjustments, 
losses,  and  closing  inventory.  The  opening  inventory,  purchases, 
and  sales  should  reconcile  with  the  general  books. 

The  credits  for  amounts  consumed  or  lost  are  then  recorded 
in  the  books  and  charged  to  the  proper  accounts  at  an  average  price 
arrived  at  by  dividing  the  amount  of  the  opening  inventory  plus 
the  total  cost  of  the  purchases  during  the  month,  by  the  total  of 
the  quantities  of  each  of  the  above  items. 

BY-PRODUCTS 

The  production  of  by-products  absorbs  labor,  power,  supplies, 
repairs,  and  factory  overhead,  but  these  costs  cannot  be  ascertained 
and  apportioned  accurately.  The  main  product  should  receive 
credit  for  the  by-product,  as  produced,  but  the  value  is  generally 
arbitrary,  and  depends  in  most  cases  upon  the  showing  desired 
in  the  costs  of  the  main  product,  and  upon  market  conditions. 
However,  a  uniform  practice  must  be  adopted  and  followed  con- 
sistently, and  the  method  of  valuing  the  by-product  must  be  a 
conservative  one.  There  is  a  difference  of  opinion  as  to  whether 
the  value  of  the  by-products  is  a  credit  to  the  raw  material  cost, 
or  to  the  total  manufacturing  cost  of  the  main  product  in  bulk. 
It  would  seem  more  logical  that  the  by-product  credit  should  be 
applied  to  the  total  manufacturing  cost  rather  than  to  give  a  single 
element  benefit  for  the  entire  value,  because  the  former  cost  includes 
the  other  elements  of  labor,  power,  repairs,  depreciation,  and  over- 
head, although  its  amount  is  arbitrary.  On  the  other  hand,  it  is 
desirable  to  show  the  raw  material  cost  at  a  figure  which  might 

7 


be  compared  with  the  price  of  the  material,  after  the  by-products 
are  extracted,  on  the  theory  that  the  main  product  should  absorb 
all  production  charges,  and  that  the  by-product  value  should  be 
based  on  material  cost  only.  This  question  is  one  which  affects 
merely  the  presentation  of  cost  figures,  because  the  total  manu- 
facturing cost  of  the  product  is  not  changed  by  either  method. 

CONVERSION  OF  THE  RAW  MATERIALS 

When  the  raw  material  has  been  prepared  for  consumption 
the  next  step  is  to  convert  it  into  the  finished  product,  which  require 
labor,  power,  fuel,  supplies  and  repairs.  These  costs  are  grouped 
as  elements  of  "Conversion  Cost." 

Productive  Labor 

When  one  visits  a  chemical  plant,  the  scarcity  of  laborers  is 
very  evident,  because  many  processes  are  run  without  interruption 
and  mechanical  devices  are  used  to  a  very  great  extent.  The  labor 
required  by  various  processes  depends  upon  the  mechanical  devices 
available  and  the  importance  of  the  product.  The  handling  of 
materials  and  finished  products  requires  the  largest  percentage 
of  the  labor,  the  other  operations  being  performed  by  a  few  skilled 
chemists  and  foremen. 

In  order  to  arrive  at  the  direct  and  indirect  labor  costs  the 
time  clock  cards  are  extended  and  summarized  weekly  by  employees 
and  by  departments.  The  summary  is  made  on  sheets  which  pro- 
vide for  monthly  totals.  From  this  record,  a  monthly  report  of 
payroll  distribution  can  be  prepared.  This  report  serves  as  a  basis 
for  a  monthly  journal  entry  distributing  the  labor  charges  for  the 
month. 

The  transfer  of  materials  from  their  storage  place  to  the 
department  where  they  are  to  be  used  may  involve  the  expenses 
of  handling  by  teams  within  the  yard.  This  expense  is  a  cost  to 
be  added  to  the  labor  cost,  although  not  included  therein  when 
distributing  overhead.  The  total  cost  of  operating  yard  teams  is 
kept  in  a  separate  account,  and  distributed  monthly  on  the  basis 
of  the  work  reported  done  by  the  teams. 

Power,  Light  and  Heat,  and  Fuel 

A  considerable  amount  of  power  and  heat  is  required  for  the 
treatment  of  materials  in  their  conversion  into  the  finished  product. 
If  an  independent  power  plant  is  maintained,  the  cost  of  the  power 
produced  will  be  represented  by  the  cost  of  operating  the  power 
plant.  From  the  meter  readings,  the  power  produced  and  the 
power  consumed  in  the  various  departments  can  be  ascertained. 
The  power  cost  is  distributed  on  the  basis  of  the  report  of  those 
readings.  If  the  power  is  purchased  outside,  the  necessary  read- 

8 


ings  of  power  purchased  can  be  obtained  from  the  invoices.  Power 
used  in  the  various  departments  may  be  ascertained  from  meters 
installed  in  those  departments,  or  if  no  meters  are  installed  in  the 
various  departments  the  best  possible  distribution  must  be  used. 
The  manufacture  of  some  chemicals  requires  the  use  of  large  fur- 
naces involving  large  expenditures  for  coal  or  fuel  oil.  Fuel  is 
generally  purchased  in  large  quantities  and  charged  out  as  it  is 
used.  The  cost  of  each  of  the  various  kinds  of  fuel  is  kept  in 
separate  accounts,  both  in  quantity  and  in  value,  similar  to  a  raw 
material  account.  The  quantities  used  are  charged  out  at  average 
unit  costs. 

Supplies 

The  supplies  used  in  and  about  a  chemical  plant  are  quite 
numerous,  depending  upon  the  size  of  the  plant.  A  perpetual 
inventory  of  the  supplies  in  the  storehouse  should  be  maintained. 
At  the  end  of  each  month,  a  report  of  requisitions  filled  should 
be  prepared.  The  total  expense  of  operating  the  storehouse  for 
the  month  should  be  ascertained.  This  storehouse  expense  should 
then  be  distributed  on  the  basis  of  the  value  of  supplies  requisi- 
tioned, and  the  combined  value  and  expense  should  be  charged 
as  the  cost  of  supplies  used  in  the  various  departments. 

Any  supplies  not  under  storehouse  control,  should  be  kept  in 
accounts  similar  to  the  raw  material  accounts  and  should  be 
charged  out  to  the  various  departments  when  used,  as  per  reports 
thereof,  at  an  average  unit  cost. 

Repairs 

The  chemical  action  of  the  products  on  the  machinery  and 
buildings  necessitates  frequent  repairs.  It  is  difficult  to  anticipate 
the  extent  of  these  repairs  in  the  course  of  a  year  with  any  degree 
of  accuracy. 

These  repairs,  as  well  as  that  portion  of  any  replacements 
which  do  not  add  to  the  value  of  the  equipment  as  it  was,  prior 
to  the  replacement,  are  proper  charges  to  costs  and,  on  account 
of  the  departmentalization  of  the  plant  by  products,  are  directly 
chargeable  to  the  products.  Their  occurrence,  however,  is  not 
constant  in  amount,  so  that  if  they  were  charged  direct  to  costs 
as  they  occur,  the  monthly  cost  figures  would  be  disturbed.  There- 
fore, in  order  to  spread  the  item  of  repairs  evenly  over  the  monthly 
cost  figures,  an  amount  is  set  aside  each  month  as  a  reserve  for 
repairs,  and  the  actual  expenditures  when  made  are  charged  against 
that  reserve. 

A  careful  study  of  plant  conditions  and  past  experience  will 
enable  the  cost  department,  in  co-operation  with  the  factory  engi- 
neers, to  arrive  at  a  fairly  close  estimate  of  anticipated  repair 
charges  for  the  year  by  departments.  Monthly  journal  entries 
should  then  be  made  charging  one  twelfth  of  the  estimated  neces- 

9 


sary  reserve  to  costs  and  crediting  the  reserve.  If  a  department 
is  not  operating  for  a  whole  month,  it  is  assumed  that  it  will  not 
necessitate  making  repairs,  and  consequently  no  reserve  is  set  aside. 

The  actual  outlay  and  the  reserves  for  repairs  must  be  watched 
closely,  because  it  may  be  found  necessary  to  adjust  the  monthly 
reserve  charge,  during  the  course  of  the  year,  in  order  to  take  care 
of  unexpected  repairs.  The  difficulty  in  anticipating  repairs  makes 
it  desirable,  as  well  as  conservative,  to  adjust  the  reserves  to  the 
actual  expenditures,  in  the  last  month's  cost  figures,  of  each  year. 
This  adjustment  should  appear  as  a  separate  figure  so  as  to  aid 
the  comparisons  with  former  months.  This  procedure  will  result 
in  annual  cost  figures  which  are  based  on  actual  repairs  and  does 
not  require  the  carrying  forward  on  the  balance  sheet  of  a  deferred 
debit  or  deferred  credit  of  questionable  value. 

OVERHEAD  EXPENSES 

The  segregation  of  overhead  expenses,  as  set  forth  on  the  cost 
sheet  on  page  5  shows  four  items,  namely,  taxes,  insurance, 
depreciation  and  works  expense.  Taxes  and  insurance  are  handled 
in  the  usual  manner. 

Taxes 

Taxes  are  distributed  on  the  basis  of  the  values  in  the  various 
departments  as  shown  by  the  records  of  plant  values. 

Fire  and  Liability  Insurance 

Liability  insurance,  especially  workmen's  compensation,  pre- 
sents a  problem,  when  distributing  the  expense  thereof  to  costs, 
owing  to  the  diversity  of  operations  which  may  be  covered  under 
a  blanket  rate.  The  distribution  of  this  expense  to  costs  can  best 
be  done  in  the  light  of  the  conditions  stated  in  the  policies  obtained 
but  if  those  conditions  are  too  involved  an  average  rate  may  be 
used.  As  the  premium  for  this  insurance  is  based  on  payrolls, 
the  distribution  of  the  premium  is  based  on  the  cost  of  labor. 

For  those  plants  where  insurance,  especially  against  fire,  is 
hard  to  obtain,  it  is  advisable  to  build  up  an  insurance  fund  by 
charging  costs  and  crediting  the  reserve  fund  monthly  with  the 
approximate  legal  reserve  cost  of  the  insurance  if  purchased  out- 
side. This  will  in  time  provide  a  fund  of  sufficient  size  to  take 
care  of  any  fire  losses.  However,  the  risk  of  loss  in  the  early  years 
before  the  fund  has  assumed  sufficient  proportions  presents  an 
argument  against  the  initial  establishment  of  such  a  fund  unless 
adequate  insurance  can  be  carried  during  the  accumulation  of  this 
reserve  and  then  reduced  as  the  reserve  increases. 

Depreciation  and  Obsolescence 

The  depreciation  of  machinery  in  the  chemical  industry  de- 
pends on  so  many  factors  that  the  rate,  which  will  vary  from  10 

10 


per  cent  to  20  per  cent,  or  more,  can  best  be  determined  by  a  careful 
study  of  the  conditions  existing. 

Obsolescence  is  a  material  factor  in  the  chemical  industry, 
due  to  the  frequent  changes  in  manufacturing  equipment  and,  in 
the  case  of  minor  chemicals,  the  discovery  of  other  chemicals  to 
replace  the  use  of  those  now  being  produced.  To  determine  this 
factor  of  obsolescence  is  most  difficult,  yet  it  is  an  element  of  cost 
which  can  not  be  overlooked.  The  amount  is  determined  by  study- 
ing the  facts  in  each  case,  and  by  the  judgment  of  the  chemical 
engineers  acquainted  with  the  particular  problem.  To  enable  the 
proper  distribution  of  this  element  of  cost  as  well  as  those  other 
elements  of  cost  which  are  based  on  plant  values,  it  is  essential  to 
maintain  careful  and  detailed  departmental  records  of  the  invest- 
ment in  the  plant. 

Works  Expense 

The  works  expense  in  a  chemical  plant  includes  such  items 
as  superintendence,  indirect  labor,  laboratory  expense,  general 
works  expense,  works  office  expense,  watchmen,  insurance,  first 
aid  expense,  plumber  shop  expense  and  the  costs  of  other  service 
departments.  The  number  of  classifications  kept  depends  on  the 
detailed  data  desired. 

Many  of  these  items  are  easily  distributed  on  separate  and 
equitable  bases.  For  example,  first  aid  expense  which  would  repre- 
sent the  cost  of  conducting  a  works  hospital  can  best  be  distributed 
to  the  various  departments  on  the  basis  of  the  number  of  treatments 
received  by  the  employees  of  those  departments  during  the  month. 

Some  of  the  service  departments  such  as  carpenters'  shop, 
plumbers'  shop  and  machine  shop  present  individual  cost  problems 
in  production  order  cost  accounting.  Service  departments  are 
primarily  concerned  in  repairs,  renewals,  and  additions  to  the 
plant.  Rather  than  charge  repairs  with  the  overhead  of  these 
service  departments  or  capitalize  the  overhead,  it  is  more  con- 
servative to  charge  this  overhead  into  manufacturing  expenses. 
This  method  also  avoids  the  pyramiding  of  overhead  on  account 
of  interdepartmental  charges  and  credits. 

For  those  items  of  overhead  which  can  not  be  distributed  on 
a  special  basis,  an  equitable  plan  of  distribution  must  be  adopted. 

After  giving  due  consideration  to  all  factors  involved  the  "man 
rate"  seems  to  be  the  most  satisfactory,  whereby  each  process 
is  charged  a  portion  of  overhead  based  on  the  number  of  dollars 
expended  for  labor  in  that  process,  in  its  relation  to  the  total 
productive  labor  cost.  The  labor  employed  in  a  chemical  plant 
ranges  from  ordinary  manual  labor  required  in  handling  materials 
and  furnaces,  to  the  skilled  labor  required  to  watch  the  chemical 
processes.  This  condition  makes  the  use  of  the  man  hour  method 
unsatisfactory. 

11 


Owing  to  the  large  capital  investment  in  a  chemical  plant  some 
consideration  has  been  given  to  a  plan  for  the  distribution  of  manu- 
facturing overhead  on  the  basis  of  the  investment  in  the  buildings 
and  equipment  in  each  department.  This  method  raises  questions 
regarding  the  idle  plant  and  the  use  of  cost  or  depreciated  capital 
values.  For  some  companies  this  method  may  be  more  equitable 
than  any  other. 

IDLE  PLANT 

In  a  chemical  concern  maximum  earnings  require  capacity 
production.  This  is  difficult  to  maintain  due  to  frequent  break- 
downs, seasonal  products,  weather  conditions,  market  conditions, 
and  the  concentration  at  times  on  the  production  of  profitable 
products,  at  the  expense  of  the  unprofitable  ones. 

In  any  system  of  cost  accounting  it  is  highly  desirable  to  ohow 
in  the  accounts  the  unabsorbed  burden,  which  avoids  the  inflation 
of  inventories.  The  many  different  processes  and  conditions  exist- 
ing in  a  chemical  plant  would  make  a  budgetary  control  of  produc- 
tion and  overhead  impracticable,  since  it  can  not  be  estimated  in 
advance  what  the  ratio  of  overhead  to  each  unit  produced  should  be. 

However,  a  close  approximate  cost  of  idleness  or  unabsorbed 
burden  in  the  various  departments  can  be  ascertained.  In  order 
to  do  this,  daily  records  are  kept  of  the  idle  departments  which 
are  summarized  at  the  end  of  each  month.  As  a  practical  matter, 
it  is  advisable  to  set  a  minimum  number  of  idle  days,  five  for 
example,  below  which  no  account  will  be  taken  in  figuring  idle 
plant.  These  may  or  may  not  include  Sundays  and  holidays  de- 
pending on  whether  the  process  is  operated  continuously  or  not. 

At  the  end  of  the  month,  the  same  proportion  of  those  manu- 
facturing expenses  which  remain  constant  whether  the  plant  is 
operating  or  idle,  which  the  actual  number  of  idle  working  days 
in  the  month  bears  to  the  normal  number  of  working  days  in  the 
month,  represents  a  loss  from  idle  plant. 

Occasion  may  arise  when  a  department  uses  a  small  amount 
of  labor  during  a  month  with  a  consequent  charge  for  works  ex- 
pense, and  yet  in  such  a  case  there  may  be  no  production  during 
that  month.  The  purpose  of  such  labor  would  generally  be  to 
improve  the  product  for  the  market.  As  such  it  is  charged  (labor 
and  works  expense)  into  finished  goods,  and  the  other  overhead 
expense  is  charged  to  loss  from  idle  plant.  The  proper  treatment 
in  the  cost  and  general  accounts  of  the  loss  from  idle  plant  depends 
upon  the  cause  of  the  idleness.  It  may  represent  a  proper  charge 
against  production,  a  selling  expense,  or  a  direct  charge  to  the 
profit  and  loss  account. 

DETAILED  OVERHEAD  EXPENSE  REPORTS 

As  further  information  for  the  factory  management  in  regard 

12 


to  the  items  which  enter  into  the  manufacturing  overhead  expenses, 
are  monthly  reports  of  these  overhead  expenses.  These  reports 
can  be  prepared  easily  in  columnar  form  so  as  to  show  monthly 
comparisons.  By  stating  therein  the  principal  charges  to  each 
of  the  expense  accounts,  the  reasons  for  fluctuations  can  be  investi- 
gated readily  and  immediate  steps  can  be  taken  to  eliminate  unnec- 
essary burden. 

COST  IN  BULK 

When  the  manufacturing  cost  figures  have  been  accumulated 
to  the  point  that  shows  the  manufacturing  cost  in  bulk,  it  is  divided 
by  the  units  produced,  the  result  being  the  unit  cost  for  the  month. 

It  is  advisable  to  show  the  manufacturing  costs  on  the  cost 
department's  reports  in  terms  of  the  commercial  strength  as  well 
as  the  standard  strength,  where  those  strengths  differ.1 

Comparison  of  this  figure  for  different  months  may  show  ques- 
tionable discrepancies  which  may  be  accounted  for  by  the  "yield," 
or  by  errors  in  the  reports  of  production  or  of  raw  materials  used. 

By  yield,  is  meant  the  average  volume  of  production  which 
should  be  obtained  from  a  certain  quantity  of  raw  materials  con- 
sumed. The  skilled  chemists  can  supply  this  information  to  the  cost 
accounting  department  and  from  that  data  the  percentage  of  effi- 
ciency can  be  ascertained  and  shown  on  the  cost  sheets. 

The  competent  cost  accountant  must  read  his  reports  very 
critically  in  order  to  present  clear  statements  with  concise  com- 
ments regarding  the  fluctuations  in  costs. 

With  a  few  exceptions  no  account  is  kept  of  goods  in  process, 
because  there  are  but  few  products  which  might  be  in  process 
at  the  end  of  the  month  and  which  can  be  separated.  Theoretic- 
ally, there  is  a  portion  of  each  chemical  in  process  at  the  end  of 
every  month,  but  this  is  overlapping  and  cannot  be  arrived  at 
readily.  When  the  product  is  completed  it  is  either  sold  or  used 
in  another  process  in  the  same  plant. 

It  should  be  emphasized  that  the  elimination  of  the  goods  in 
process  account  is  not  at  all  general  in  other  industries. 

PRODUCTION  REPORTS 

The  works  accounting  department  supplies  the  cost  depart- 
ment with  the  quantities  produced  monthly.  There  are  some  proc- 
esses in  which  the  product  is  constantly  being  used  as  produced, 
thus  making  it  very  difficult,  if  not  impossible,  to  ascertain  directly 
the  quantities  produced. 

Under  such  conditions  productions  are  determined  by  deduc- 
tion. The  stock  on  hand  at  the  beginning  of  the  month  is  known, 


1  See  Appendix  for  further  comment. 

13 


and  by  measuring  the  tanks,  in  the  case  of  liquids,  or  by  weighing 
or  estimating,  in  the  case  of  solids,  the  stock  on  hand  at  the  end 
of  the  month  can  be  ascertained.  From  the  shipping  department 
the  sales  can  be  obtained  and  from  the  receiving  department  the 
purchases,  if  any.  The  closing  inventory  plus  sales,  less  the  open- 
ing inventory  plus  purchases  gives  the  production,  after  taking 
into  consideration  any  necessary  adjustments.  The  production 
thus  arrived  at  should  reconcile  with  the  quantities  reported  as 
received  in  the  departments  which  use  the  product.  Any  differ- 
ences, which  often  occur  due  to  evaporation,  leakages,  and  similar 
conditions,  are  either  absorbed  by  the  departments  using  the 
product,  or  if  the  discrepancy  is  abnormally  large,  are  charged  off 
to  profit  and  loss.  The  production  of  a  certain  chemical  may 
involve  the  production  of  two  or  more  distinct  elements  in  the 
final  product.  Information  regarding  quantities  produced  and  the 
manufacturing  cost  of  each  element  in  such  a  group  is  often  of 
great  value.  Therefore  in  accounting  for  the  cost  of  such  a 
product,  it  is  treated  in  the  accounts  as  two  or  more  distinct 
products,  and  later  the  cost  of  each  product  is  combined. 

FINISHED  GOODS  PURCHASED 

At  times  it  is  necessary  to  purchase  from  outsiders  goods  which 
are  produced  by  the  plant  in  order  to  meet  the  demands  of  the 
trade  as  well  as  the  requirements  of  other  products  which  use  such 
finished  product  as  a  raw  material  in  their  process.  Such  pur- 
chases must  be  kept  separate  in  the  accounts  so  that  the  costs  of 
the  same  product  produced  at  the  plant  shall  not  be  affected,  (gen- 
erally increased),  and  so  that  the  earnings  on  such  transactions 
may  be  ascertained  separately.  These  purchases  are  handled  in 
accordance  with  the  same  principle  as  raw  materials  are,  as  already 
explained.  In  charging  out  these  purchased  goods  to  manufac- 
turing costs,  it  is  desirable  to  use  the  cost  of  production  of  the 
similar  product  within  the  plant,  and  then  to  show  the  excess,  that 
is  the  difference  between  the  production  and  the  invoice  costs,  as 
a  separate  charge  for  raw  materials  to  the  department  in  which 
they  are  used. 

TRANSFERS  OF  FINISHED  PRODUCTS 

Inter-departmental  transfers  of  finished  products  should  be 
made  at  cost  without  any  element  of  profit.  The  cost  to  be  used 
may  differ.  Where  a  product  is  pumped,  as  produced,  direct  into 
another  process,  as  a  raw  material,  the  use  of  the  current  month's 
manufacturing  cost  in  bulk  is  justifiable,  whereas  in  case  a  product 
is  produced  and  stored  away  in  stock  and  is  drawn  on  from  stock 
for  use  in  other  departments,  the  average  stock  cost  of  the  product 
so  transferred  is  used. 

Many  of  the  departments  are  dependent  upon  one  or  more 
of  the  other  departments.  This  inter-departmental  relationship 
makes  it  necessary  to  start  each  month's  costs  by  using  the  average 

14 


cost  of  the  opening  inventory,  for  that  month,  of  that  finished 
product  which  is  a  basic  element  used  in  manufacturing  the  plant's 
most  representative  product.  When  the  inter-departmental  trans- 
fers have  thus  been  started,  the  other  products  can  readily  be  costed 
for  the  month. 

COST  OF  PACKING  AND  PREPARING  PRODUCTS  FOR  SHIPMENT 

The  labor  and  consequent  overhead  involved  in  packing  and 
preparing  certain  products  for  shipment  is  not  separable  from 
the  manufacturing  labor,  in  all  cases,  as  the  same  labor  that  attends 
to  the  manufacturing  process  attends  to  the  packing  of  the  product. 
However,  in  such  cases  the  cost  of  the  containers  used  can  readily 
be  ascertained.  On  the  other  hand,  the  packing  of  some  products 
involves  a  separate  process,  such  as  grinding,  which  is  accounted 
for  through  separate  manufacturing  accounts.  Earlier  in  this 
article  consideration  was  given  to  the  item  of  containers  as  it 
affects  the  cost  of  raw  materials.  The  relation  of  containers  to 
the  cost  of  finished  goods  prepared  for  shipment  will  now  be 
discussed. 

The  cost  of  containers  used  must  be  considered  from  two  view- 
points, namely:  non-returnable  and  returnable  containers.  Non- 
returnable  containers  such  as  slack  barrels,  small  kegs,  boxes  and 
cartons  are  purchased  in  large  quantities  and  are  kept  in  separate 
accounts  both  as  to  quantities  and  values.  As  they  are  used,  they 
are  charged  out  at  average  stock  costs.  The  problem  of  returnable 
containers  is  a  more  difficult  one.  Space  will  not  permit  of  a 
complete  discussion  of  this  problem. 

The  most  important  of  the  returnable  containers  used  in  a 
chemical  concern  are  carboys,  tight  barrels  and  drums.  A  chem- 
ical concern  generally  maintains  separate  departments  for  making 
and  repairing  carboys,  tight  barrels,  and  drums.  Separate  ac- 
counts are  kept  showing  the  total  costs  of  operating  these  depart- 
ments. In  order  to  separate  the  maintenance  charges  from  the 
cost  of  making  new  containers  in  these  departments,  records  must 
be  kept  of  parts  on  hand,  received  and  used,  and  the  number  of 
new  containers  or  container  parts  made.  The  capitalizable  por- 
tions of  these  accounts  are  separated  on  the  conservative  basis  of 
the  average  quantity  of  materials  used  in  the  manufacture  of  the 
containers  and  at  their  average  cost.  This  average  basis  is  adopted 
because  it  is  practical  and  does  not  fluctuate.  The  balance  of  the 
account  represents  maintenance  charges  which  are  absorbed.1 

In  addition  to  the  cost  of  maintaining  returnable  containers, 
there  is  the  element  of  depreciation.  The  depreciation  of  each 
type  of  returnable  container  is  figured  on  the  estimated  life,  and 
the  average  number  of  trips  which  the  returnable  container  will 
make,  after  allowing  for  the  estimated  salvage  value,  if  any.  The 
amount  of  depreciation  thus  arrived  at  is  used  uniformly  as  an 
element  of  the  cost  of  packing.  No  distinction  is  made  between 

^ee  Appendix   for  further  comment. 

15 


the  containers  packed  and  the  containers  shipped,  as  for  practical 
purposes  they  are  the  same,  because  the  containers  are  generally 
always  packed  only  as  required  for  shipment. 

The  container  cost,  for  goods  shipped  in  containers  which  the 
customer  has  the  privilege  of  returning,  consists,  therefore,  of 
maintenance  and  depreciation.  The  maintenance  charge  for  each 
type  of  returnable  container  are  distributed  on  the  basis  of  the 
number  of  such  containers  shipped  each  month.  Likewise  the 
depreciation  charge  for  each  container  shipped  is  charged  to  the 
various  products  and  credited  to  the  reserve  for  depreciation  of 
each  type  of  returnable  container.  Any  losses  of  materials  sus- 
tained in  packing  are  absorbed  in  the  packing  cost. 

There  are  two  groups  of  accounts  kept  for  containers  in  the 
general  accounts.  One  group  of  accounts  represents  an  asset  and 
is  kept  under  the  title  of  Packages — subdivided  by  types,  at  the 
cost  price  of  containers  purchased  or  made,  which  are  to  be  used 
as  returnable  containers.  This  account  is  credited  with  the  cost 
of  such  packages  when  sold  or  destroyed.  Another  group  of 
accounts  represents  a  liability  and  is  kept  under  the  title  of  liability 
for  the  Redemption  of  Containers  in  Customers'  Hands.  The 
liability  is  to  the  customers  for  returnable  packages  charged  to 
them  and  in  their  possession  which  they  have  the  privilege  of 
returning,  if  not  damaged,  at  the  same  value  at  which  they  were 
originally  charged  to  the  customers. 

SELLING  COST  BY  PRODUCTS 

The  selling  and  administrative  overhead  and  its  proper  dis- 
tribution must  be  given  careful  consideration.  It  includes  the  cost 
of  maintaining  the  selling,  shipping  and  administrative  depart- 
ments. In  distributing  this  overhead  to  the  various  products,  sev- 
eral bases  are  advisable.  The  selling  and  shipping  expenses  are 
distributed  in  various  ways  such  as  on  the  basis  of  the  quantities 
shipped,  or  on  the  basis  of  the  cost  of  sales,  or  they  may  be  charged 
directly  to  the  product.  The  basis  of  distribution  cannot  be  fixed 
for  each  case.  It  must  be  made  in  the  most  equitable  way  after 
giving  careful  consideration  to  the  facts  peculiar  to  each  case. 
Unless  monthly  selling  costs  by  products  are  desired,  the  results 
are  of  a  more  practical  value  if  this  distribution  is  made  quarterly 
or  semi-annually,  because  the  selling  and  administrative  overhead 
may  fluctuate  widely  from  month  to  month.  The  selling  cost  data 
thus  obtained,  together  with  the  manufacturing  cost  in  bulk  of 
each  of  the  products  referred  to  above  should  then  be  combined  in 
report  form  by  the  cost  department.  A  pro-forma  selling  cost 
report,  which  also  reflects  the  gross  profits  from  sales,  is  shown 
on  page  17.  This  form  of  report  is  arranged  so  as  to  set  forth, 
primarily,  the  total  selling  cost.  If  desired,  it  may  be  followed 
with  a  condensed  Trading  Profit  and  Loss  Statement  for  each 
product,  which  also  may  be  provided  with  percentage  ratios. 

16 


Selling  Cost  of- 
Month  of — 


Quantity  Per  Unit 

Sold  Amount  of  Measure 

Manufacturing  Cost  of 

Net  Sales  in  Bulk  $ 

Grinding  Costs  ....  .... 

Packing  Costs  ....                  


Total  Factory  Cost 

Prepared  for  Shipment 
Selling  and 

Administrative  Overhead : 

Selling  and 

Shipping  Expenses 

Administrative  Expenses 


Total  Selling  Cost  $_ 

Gross  Sales  $ 

Less: 

Returns  and  Allowances     $  (enter 

in  red) 

Freight  Out 

Net  Sales 
Deduct : 

Total  Factory  Cost 

Prepared  for  Shipment 

Gross  Profit  $ 

Deduct : 
Selling  and 

Administrative  Overhead 


Net  Trading  Profit 


APPENDIX 


The  following  supplementary  remarks  to  the  main  body  of 
this  article  may  be  of  interest  to  those  unfamiliar  with  chemical 
cost  accounting  and  some  of  the  terminology  used  in  the  chemical 
business. 

An  idea  of  what  is  meant  by  chemical  factors  may  be  gained 
from  the  following.  The  Manufacturing  Chemists'  Association  has 
established  certain  factors  for  reducing  the  varying  strengths  of 

17 


Sulphuric  Acid,  Hydrochloric  (Muriatic)  Acid,  and  Nitric  Acid  to 
one  strength.  For  example,  Sulphuric  Acid  may  be  produced  in 
strengths  varying  from  50  to  66  degrees  Baume.  In  the  cost  ac- 
counts an  account  may  be  kept  for  the  cost  of  manufacturing  the 
weaker  acid,  say  50  to  60  degrees  Baume,  and  another  account  for 
the  stronger  acid,  say  60  degrees  Baume  and  over.  It  is  customary 
for  the  factory  office  to  obtain  reports  of  the  separate  quantities 
of  each  strength  produced,  and  then  to  reduce  this  production  to 
one  strength,  50  or  66  degrees.  To  make  this  reduction  the  above 
mentioned  table  of  Sulphuric  Acid  factors  is  referred  to,  and  by 
the  use  of  the  necessary  factor,  the  total  production  in  the  terms 
of  the  strength  desired  may  be  calculated.  Chemical  factors  are 
based  on  percentage.  To  calculate  them  is  merely  a  matter  of 
arithmetic. 

The  meaning  of  commercial  strength  and  standard  strength 
is  brought  out  in  the  following.  The  standard  strength  of  oil 
vitriol  (Sulphuric  Acid)  is  100%,  but  in  commercial  terms  Oil  of 
Vitriol  is  thought  of  in  terms  of  66  Baume  degrees,  which  is 
slightly  less  than  100%.  In  making  certain  reports  and  com- 
parisons, especially  for  statistical  purposes,  the  100%  standard 
equivalent  of  the  acid,  shown  on  the  books  in  terms  of  its  com- 
mercial strength,  must  be  ascertained.  This  also  involves  the  use 
of  factors  mentioned  above.  This  relation  of  standard  and  com- 
mercial strength  holds  true  in  regard  to  other  chemicals  as  well. 

With  regard  to  the  balance  of  the  Containers'  Department 
account  referred  to  on  page  fifteen,  it  might  be  said  that  after 
taking  out  the  cost  of  the  new  containers  produced  at  a  fixed  aver- 
age cost,  the  balance  represents  the  cost  of  repairing  the  old 
containers,  and  keeping  them  in  usable  condition.  This  balance 
is  then  distributed  to  the  various  productive  departments  on  the 
basis  of  the  number  of  such  containers  shipped  each  month  as 
explained  on  page  sixteen. 


18 


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